Emma Wall: Hello and welcome to Morningstar. I’m Emma Wall and joining me today to give his three stock picks is Adrian Gosden, manager of the GAM UK Equity Income Fund.
Adrian Gosden: Good morning.
Wall: So, what’s the first stock you’d like to highlight today.
Gosden: I’d like to highlight a stock that appears in our top 10 holdings in the GAM UK Income Fund, and that is Land Securities (LAND). Land Securities is a £7 billion market UK listed company and it deals in commercial property, big retail and big offices. It trades at about just over 30% discount with stated assets, so no one really values them as the value appears to me. They give a dividend yield of over 4% which is attractive relative to the market and the good news is their loan to value is only 20% of the value of the properties that’s extremely low across history.
Now as I look at that it clearly has some concerns about maybe the UK’s role, particularly London in Europe going forward. And the shares have been very poor since the Brexit vote. But if you look in the bond market they just issued a bond in September of this year 40-year bond to 2057. On a coupon of 2.7% and it trades at a premium. So, the bond market is looking at the same set of assets, same buildings and saying we like it.
The equity market is looking at the same set of assets and going we need a 30% discount and I need a 4% dividend yield. So, to me there is value there. what will be the outcome of the Brexit negotiations I have no idea, but at a 30% discount starting point its in my top 10.
Wall: And what about your second stock pick.
Gosden: The second stock I am going to pick is probably in the mid-cap area. So, £600 million is Halfords (HFD). Halfords is UK retailer and it sells, bikes, car parts and tents if you tend to go to those festivals. Just had results and they showed 1.4% growth in their like for like sales in their stores. So not really dynamic, but it is growth, it’s not going backwards and 95% of the people who do buy online is click and collect. They actually go to the store to get it.
So, they do have that contact point with customers, that I really like in my retailers. The shares are trading on a P/E multiple of 10 and the dividend yield is 6% and it is growing. There is a new CEO to join in January and I am really excited that this is just a share that is UK, retail, but that’s reflected in the share price.
Wall: And how much do you have to consider whether what’s reflecting share price is correctly reflected and how much do you think there is growth opportunity there. Because I suppose there is an argument with inflation running high, no wage inflation that actually if I am being squeezed as a household I might not buy a bike.
Gosden: Absolutely. And that’s the important point. They keep their prices competitive. But I think you are going to see some wage inflation going forward, not immediately, but it is starting to come through. I noticed in a lot of the companies I analyse those have been on minimum wage are clearly seeing that increase.
But elsewhere in the group I think we’ve been in this brutal period where there have been no wage increases. They are starting to occur. So that backdrop I think gets better. But your point is absolutely right. Your sales offering has to be dynamic. It has to be the right price and you’ve got to be there for the customer going forward in terms of servicing it.
Wall: And what about the third and final pick?
Gosden: The third and final, I think, I will go much smaller, maybe down to Wincanton (WIN), which is a UK distribution company. Again, we’ve recently heard from them. They are just featuring things. I like to have recently heard from someone, because it’s a very uncertain world out there.
Again, a price to earnings multiple of 9, not very well-regarded by the market and rightly so. This is a cyclical business. They win contracts; they lose contracts; pricing changes. They are doing a great job of moving food and things like furniture around the U.K. So, again, maybe a U.K.-focused company, but one that is winning contracts. The recent one they just won was from Ikea. That’s a good contract to win. So, I like to see businesses making progress. If people don’t like them because of the geography they are in, that’s fine, too. But you got to hear from the management, let them articulate their strategy and see if it’s in the price.
Wall: Adrian, thank you very much.
Gosden: You’re welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
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